While most people understand the benefits of trade on a free market within a country, free international trade is not as universally seen as beneficial. Yet exactly the same factors that make trade within a country beneficial apply to international trade. If trade is restricted, say through tariffs or import quotas, that creates, by definition, a market imperfection. It is no wonder that free market economists generally believe the advantages of free trade outweigh any disadvantages.

Trade happens constantly, in supermarkets, between businesses, on the Internet. It is how the demand and supply curves and their intersection determine “market price”. People and businesses will look for the best price for goods or services and buy the one that has the lowest price when all factors such as quality and durability are figured in. To continue in business, the supplier has to ger a price that includes all the costs of producing the good or service, transportation costs, etc. and any taxes, such as state cigarette tax that have to be paid when crossing state lines^[1].

It is intuitive that trade within a country is a good thing. If every state had to have its own car factory, cars would cost a lot more because there are enormous economies of scale in the automobile industry. Maine would find it very expensive to grow oranges in greenhouses, while Florida is not really great for potatoes.

As these examples suggest, trade within a country increases not only competition but also the variety of goods and services that can be purchased. It also suggests that a state within a country, or rather the producers in each state, should and will produce what they produce most efficiently compared to other states. Indeed, trade is largely about differences in productivity between locations. To get a feel for this, let’s look at how wages in a traded good are related to productivity differences.

^[1] Cigarette smuggling far outpaces illegal drug smuggling in the USA in dollar volume terms.